The 21st Century has seen unprecedented levels of corporate tax aggressiveness and avoidance. This Article continues our exploration of second-best international tax reforms that would protect the U.S. corporate tax base and have some likelihood of adoption. In this case, we consider how a U.S. minimum tax on foreign income earned by a controlled foreign corporation should be designed to protect the United States against erosion of its corporate income tax base and to combat tax competition by low-tax intermediary countries. In the authors’ view, a minimum tax should be an interim levy that preserves the residual U.S. tax on foreign income, as distinguished from a final minimum tax that partially eliminates the U.S. residual tax. An interim minimum tax would be a significant improvement over current law and would more effectively limit incentives to seek low-taxed foreign income while ameliorating pressure to retain excess earnings abroad.To achieve the objectives of such a minimum tax, corresponding changes should be made to the U.S. corporate resident definition, the source taxation of foreign multinational corporations, and the residence taxation of U.S. portfolio investors in foreign corporations to reduce tax advantages under current law for investments in foreign corporations. These changes would reduce tax advantages for foreign parent corporate groups and thereby further protect the U.S. tax base, as well as reduce incentives for U.S. corporations to expatriate as a consequence of increased U.S. taxation of foreign income under an interim minimum tax.
Reform of the U.S. international income taxation system has been a hotly debated topic for many years. The principal competing alternatives are a territorial or exemption system and a worldwide system. For reasons summarized in this Article, we favor worldwide taxation if it is real worldwide taxation; that is, a nondeferred U.S. tax is imposed on all foreign income of U.S. residents at the time the income is earned. However, this approach is not acceptable unless the resulting double taxation is alleviated. The longstanding U.S. approach for handling the international double taxation problem is a foreign tax credit limited to the U.S. levy on the taxpayer's foreign income. Indeed, the foreign tax credit is an essential element of the case for worldwide taxation. Moreover, territorial systems often apply worldwide taxation with a *
Copyright © 2001 by J. Clifton Fleming, Jr., Robert J. Peroni & Stephen E. Shay. All rights reserved.The ability-to-pay fairness concept is a key factor underlying the historic U.S. policy of relying principally on the income tax to finance federal government expenditures. Indeed a major justification for this reliance, as opposed to significant dependence on consumption levies, is that the income tax is a system for spreading the costs of government in a way that advances fairness by giving substantial deference to comparative ability-to-pay.Consequently, one would expect tax policy analysts to routinely examine the equity implications of international income tax rules by applying the fairness criterion with the same rigor as in the domestic context. But surprisingly, there has been relatively little discussion in the literature regarding the role of the ability-to-pay concept in analyzing international tax policy issues. This may be because the composition of international investment historically has been dominated by the direct foreign investments of multinational corporations, which pose perplexing issues in evaluating fairness concerns. Even if true, however, this is an inadequate reason to forego analysis of fairness considerations when scrutinizing the important international dimension of a modern income tax. In this article, we examine the role that fairness concerns, embedded in the abilityto-pay concept, play in justifying the U.S. policy of taxing U.S. residents on their worldwide incomes.
Corporate expatriations are back in the news. Leading the way is a potential blockbuster transaction in which the massive U.S. drug company Pfizer Inc. would be acquired by the smaller Allergan PLC, an Irish receptacle for serial inversions of former U.S. companies Actavis, Forest Laboratories, and Allergan. 1 The Pfizer-Allergan transaction is designed to avoid the reach of the statutory rule that restricts some of the tax benefits of an inversion. 2 Other transactions within the reach of the statutory anti-inversion rule-but not discomfited by it because the acquiring foreign corporation is not reclassified as a U.S. corporation for tax purposes-are attracting less attention but also highlight the continued advantages of having a U.S. business owned by a foreign parent company. 3 The motivation for this article is twofold: (1) to reemphasize the need to reduce the U.S. tax incentives for inversion-type acquisitions, 4 and (2) to
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